Question

In section 7.2 of the text, it states: “The pattern of costs varies among industries and even among firms in the same industry. Some businesses have high fixed costs, but low marginal costs.” Aside from the examples cited in the book, identify one industry with high fixed costs in the short run. Then, identify an industry with high marginal costs in the short run. Be sure to analyze specific examples of costs to justify your choices.

Answer 1

Fixed costs, refers to the costs that cannot be changed in the short run even if there is a change in the quantity produced. The costs incurred by a firm for installation of machines and other capital goods comes under fixed costs. Example of an industry with high fixed costs would be Mining industry, because it has to install costly machineries to start mining. Other examples include, cement manufacturers, heavy metal industries, etc.

Marginal cost refers to the cost incurred in production of one extra unit of a good. The cost of manufacturing one additional pen, book, icecrice ,etc., would come under marginal cost.

Example of an industry with high marginal cost would be, bus manufacturing company because producing one extra bus requires a lot of money. Other example would be house construction company as it requires huge costs to be incurred to build/ produce one additional house( like payment of construction workers and engineers, cost of interior designing, costs of materials used, etc.).